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Saudia: transformation and dual brand strategy drive rapid growth

Saudia has achieved significant market share gains as the airline group has accelerated expansion under its ambitious transformation programme. In 2018 Saudia captured almost 40% of Saudi Arabia’s international market – both in the scheduled and the non-scheduled religious pilgrimage segments – and the group’s domestic share increased to around 75%, ending several years of declines. 

Saudia has accelerated international growth at the parent full service brand and has been using its new LCC subsidiary flyadeal to accelerate growth in the domestic market. The group has renewed and expanded its fleet, with a staggering 88 aircraft deliveries in just three years.

The group will continue to take delivery of aircraft at a rapid rate over the next several years following a commitment for at least 30 737 MAX 8s that was announced by flyadeal on 21-Dec-2018. Both brands are planning rapid narrowbody growth; Saudia will take over the A320ceos now operated by flyadeal and is also acquiring at least 30 A320neo family aircraft. 

Saudia is among the 30 largest airlines in the world and is now also among the top 25 airline groups (based on seat capacity). The Saudia Group’s scheduled weekly seat capacity will exceed one million in 2019 and its scheduled passenger traffic should reach 40 million. In 2015, just prior to the start of the transformation programme, Saudia carried only 28 million passengers.

Saudia CEO Jaan Albrecht discusses how a new terminal at Jeddah, growth in religious traffic, product improvements and a 27% decrease in ex-fuel CASK is transforming Saudi Arabia’s flag carrier

Summary

  • Saudia has regained international market share over the past two years, to almost 40%, while the launch and rapid expansion of flyadeal has enabled the group to regain domestic market share in 2018. It retains an almost 80% share of domestic traffic.
  • The Saudia Group has taken delivery of 88 aircraft over the past three years, enabling it to accelerate expansion and introduce product improvements. 
  • Three years ago Saudia embarked on a transformation programme which has resulted in product improvements, cost reductions and a successful multi brand strategy.
  • The opening of a new terminal at its Jeddah hub and an increased focus on religious pilgrimage traffic are also key pillars to Saudia's ongoing transformation.

Saudia Group capacity approaches 1 million weekly seats 

The Saudia Group is currently generating approximately 940,000 weekly seats, including 870,000 seats at the parent full service airline and 70,000 seats at flyadeal (based on OAG schedules for the week commencing 17-Dec-2018).

Flyadeal’s capacity will increase to approximately 100,000 weekly seats in early 2019 as three A320s that are being delivered in Dec-2018 are put into service. Saudia’s weekly seat capacity should exceed 900,000 by mid 2019, resulting in 1 million seats for the group.

The group’s in-service fleet currently consists of 163 aircraft, made up of 153 aircraft at Saudia and 10 aircraft at flyadeal, according to the CAPA Fleet Database. 

The Saudia fleet is composed of 63 narrowbody passenger aircraft, 84 widebody passenger aircraft and six widebody freighters. Flyadeal plans to take one more aircraft by the end of the year, lifting its fleet to 11 aircraft (all A320s) and the group’s fleet to 164 aircraft. 

Saudia Group in-service fleet: as of end 2018


Aircraft type
Number of aircraft
Airbus A320-200 59
Airbus A321-200 15
Airbus A330-300 Regional 20
Airbus A330-300E 12
Boeing 747-8F 2
Boeing 777-200ER 6
Boeing 777-300ER 33
Boeing 777F 4
Boeing 787-9 13
Total: 164

Saudia Group takes delivery of nearly 90 aircraft in just three years 

The Saudia Group has taken delivery of a remarkable 88 aircraft in just three years, according to the CAPA Fleet Database. The 77 deliveries for Saudia (the parent airline) exceeds any airline in the Middle East has taken, and puts Saudia in the top 12 globally. 

Top 12 airlines based on number of aircraft deliveries over the past three years (2016 to 2018*)

Rank Airline Number of aircraft delivered
1. China Southern  150
2. China Eastern  149
3. Delta Air Lines  147
4. Ryanair  139
5. American Airlines 132
6. Southwest Airlines  129
7. Aeroflot  114
8. SkyWest Airlines  105
9. Air China  97
10 Hainan Airlines  95
11. Saudia 77
11. IndiGo  77

Saudia took delivery of 29 aircraft in 2016 during the first year of its transformational programme and another 29 aircraft in 2017, followed by 19 aircraft in 2018. Flyadeal took delivery of five aircraft in 2017, followed by six aircraft in 2018.

Saudia Group aircraft deliveries: 2016, 2017 and 2018 

  2016 2017 2018
Airbus A320 4 14 23
Airbus A330-300 10 10 0
Boeing 777-300ER 11 3 0
Boeing 787-9 4 7 2
TOTAL 29 29 25

All the flyadeal aircraft have been destined for growth in the domestic market.

At the parent airline, 25 of the 77 aircraft deliveries over the past three years have been for growth and 52 aircraft have been used as replacements (747-400s, older model 777s and Embraer E170s have been phased out). The replacements have also driven some growth due to higher utilisation and, in some cases, higher seat density.

Saudia regains market share as traffic growth accelerates 

Saudia’s scheduled passenger traffic has grown from 27.9 million passengers in 2015 to more than 34 million in 2018. Saudia recorded passenger growth of 7% in 2016, 8% in 2017, and 8% in the first eight months of 2018.

Most of Saudia’s growth has been in the international market, particularly since flyadeal launched operations in Sep-2017. Flyadeal has so far focused entirely on the domestic market. 

Saudia recorded 14% international passenger growth in 2017 and 13% growth for the first eight months of 2018. The international growth has enabled Saudia to increase its international market share and rapid growth at flyadeal has enabled the group to regain domestic share (which had slipped over the past several years as the market opened up to private competitors).

The Saudia Group currently has a 77% share of domestic seat capacity in Saudi Arabia and a 38% share of international seat capacity (based on OAG schedules for the week commencing 17-Dec-2018). On an annual basis, the group’s share of domestic capacity increased by 5ppts in 2018 to 75%, ending a string of several years of declines. The group’s share of international capacity has increased by 9ppts over the past two years, from 28% in 2016 to 37% in 2018. 

Saudia Group capacity share (% of seats) in Saudi Arabia

  2012 2013 2014 2015 2016 2017 2018
Domestic market seat share 92% 86% 80% 77% 74% 70% 75%
International market seat share 30% 30% 32% 31% 28% 33% 37%

Saudia international capacity now exceeds its domestic traffic  

This year Saudia will carry a broadly equal number of domestic and international passengers. The parent airline’s seat capacity for week commencing 17-Dec-2018 and for the full year is split 52%/48% in slight favour of international (based on OAG data). 

In 2016 domestic accounted for slightly more than 55% of its scheduled passenger traffic and in 2017 domestic it accounted for slightly more than 53%. While Saudia’s scheduled international passenger traffic will overtake domestic in 2019, as a group the domestic share of scheduled traffic will still be approximately 55% when flyadeal is included.

As CAPA highlighted in an 18-Dec-2018 analysis report, flyadeal expects to carry 3.5 to 4 million passengers in 2019. Domestic accounts for all – or nearly all – of flyadeal’s traffic in 2019. Flyadeal could launch international services in 2H2019 but even if this happens, its international passenger traffic for the year will be very small.

See related report: Saudi Arabia's flyadeal's major aircraft order coming soon

On 21-Dec-2018 (three days after the last report was published) flyadeal and Boeing announced a deal for 30 737 MAX 8s and 20 options. Delivery dates were not disclosed and are still being discussed. Flyadeal plans to begin introducing leased 737 MAX 8s in 2H2019 and will eventually transfer its 11 A320ceos to Saudia (this is not expected in the short term as it needs the capacity).

Saudia Group approaches 40 million scheduled passengers 

As a group, Saudia should reach 40 million scheduled passengers in 2019. In addition to the 3.5 to 4 million passengers for flyadeal, the parent airline will likely carry around 37 million scheduled passengers in 2019, including approximately 19 million in the international market. 

Although Saudia has not provided a target for 2019, the airline has previously stated that it is striving to reach 45 million passengers in 2020. It is not clear if this objective includes flyadeal but with flyadeal the group seems to be on pace to reach 45 million scheduled passengers in 2020, as well as its stated goal of 200 aircraft at the end of 2020. 

Saudia itself (without flyadeal) may also reach 45 million passengers in 2020, when its charter operation is included. Saudia always had a large charter operation focusing on the religious pilgrimage sector. Historically, a large number of the charter flights have been flown by wet leased aircraft rather than Saudia's own fleet. 

In 2017 Saudia’s charter operation carried 3.3 million passengers and accounted for nearly 10% of Saudia’s total passenger traffic. 

Saudia increases focus on religious traffic

Growth in the religious traffic segment is one of four pillars of Saudia’s transformation programme. Some of this traffic is now being carried by Saudia’s growing scheduled operation.

Previously, religious pilgrims could only enter Saudi Arabia on charter flights. A change in the Saudi Arabian visa policy is now enabling pilgrims to access scheduled flights, but this segment of the market is still heavily controlled by the government, which is obviously beneficial for the government-owned flag carrier.

Saudia CEO Jaan Albrecht told CAPA TV on the sidelines of the Nov-2018 CAPA Asia Aviation Summit in Singapore that the airline had gained 12ppts of Saudi Arabia’s religious traffic over the past two years and now has nearly a 40% share of this market segment.  

“The big market opportunity for Saudia is to regain the pilgrimage traffic”, Mr Albrecht said. “We were having below average market share and by focusing on this traffic we’ve been quite successful the last two years.”

Saudia expects further market share gains in the religious segment 

Saudia aims to achieve a 50% share of religious traffic, which should drive more rapid growth in Saudia’s international traffic. In addition to the anticipated market share gains, the total pie is increasing rapidly as the number of visitors to Saudi Arabia increases rapidly under its Vision 2030 initiative.

Saudia believes it has a competitive advantage in this segment as it offers a nonstop product, whereas other airlines serve this market with a one-stop product. “If you have strategy, really focus and put it as one of your priorities … you are regaining your fair market share and what customers actually want”, Mr Albrecht said. 

Saudia is also benefitting from government initiatives to attract more year-round religious visitors and rely less on the Hajj season. As pilgrim traffic during the much longer Umrah season has increased, Saudia has been able to expand its international operation and rely less on wet leases. 

“More and more there is growth of the pilgrimage traffic not only during Hajj season but during the other 10 months of the year which is Umrah traffic”, Mr Albrecht said. “Now with a focus product and a focused approach on pilgrimage traffic we are seeing double digit growth rates in the Umrah traffic, which is helping us a lot because in this way we are able to even out all the seasonality and all this huge traffic demand during this Hajj. It’s helping us fill the aircraft that belongs to Hajj.”

Saudia reduces reliance on wet lease aircraft 

Mr Albrecht said Saudia still wet leases 18 aircraft, which are mainly used for religious charters, but the wet leased fleet has been gradually reduced and will continue to shrink. The delivery of new widebody aircraft (A330-300s, 787-9 and 777-300ERs) has enabled Saudia to increase the size of its own fleet and improve utilisation rates, providing the capacity to carry more religious pilgrims. 

Saudia’s average annual widebody aircraft utilisation rate is now 13.2 hours, while during the 70-day Hajj season utilisation it is 16 to 16.5 hours. Saudia has phased out ageing widebody aircraft over the past few years, including all of its 747-400s and most of its 777-200ERs, enabling it to boost utilisation while also significantly improving its inflight product. 

Of the 84 widebody aircraft in Saudia’s active fleet, 78 are less than nine years old and 51 are less than three years old. 

Sixth freedom traffic flow is small, but will grow. "Not the fourth big Gulf carrier"

Inbound religious traffic accounts for approximately one third of Saudia’s total international traffic and has been the fastest growing segment. The other two main segments are labour traffic (mainly from South Asia and Southeast Asia) and Saudi nationals heading overseas (for leisure, business or studies). Each of these segments accounts for nearly another third of Saudia’s total passenger traffic.

A fourth segment, sixth freedom transit traffic, is much smaller and currently accounts for only 4% to 5% of international traffic. Saudia expects to increase sixth freedom traffic when a new terminal opens in Jeddah, which is a second pillar in its transformation programme, but sixth freedom will remain much smaller than any of the other segments.

Mr Albrecht said Saudia has previously not been able to attract significant sixth freedom traffic because its terminal at Jeddah is not friendly to connections and relies on bus gates. Saudia has begun the process of moving into a new Jeddah terminal, featuring 47 gates and significantly improved amenities, and will be fully operating from the new facility by the start of the 2019 summer schedule (in late Mar-2019). 

Mr Albrecht expects Saudia can double or even triple its sixth freedom traffic and in future this segment could account for 10% or 15% of total international traffic. However, Saudia does not expect to come anywhere close to matching what Emirates, Etihad or Qatar Airways achieve in this segment.

“The business model of this carrier is not to aspire to be the fourth big Gulf carrier,” Mr Albrecht said. “We have the domestic market, we have the pilgrimage market and we will gain a little bit from the sixth freedom traffic.”

A portion of the additional transit traffic Saudia expects to generate actually overlaps with the pilgrimage market. Saudia is starting to promote stopover packages – aimed at attracting Muslims travelling between Asia and Europe to fly with Saudia and break up the journey in one direction by taking a few days to visit the holy sites.

Saudia improves its product 

A third pillar to Saudia’s transformation is product. The new terminal in Jeddah is a key driver as it enables Saudia to improve its product on the ground at the same time as fleet renewal has led to inflight improvements. 

“With the opening of new terminal all of our passengers will be surprised with the big leap forward from Saudia”, Mr Albrecht said. “Not only at the main hub in Jeddah but overall improvement in on board service in all three classes.”

He added that in tandem with the terminal opening Saudia is improving customer service at every touchpoint – from the call centre to new catering concepts. For example, Saudia recently introduced a new bistro service in economy class on European flights.

Saudia is also in the process of installing lie-flat business class seats on the narrowbody aircraft used for medium haul flights to Europe. As CAPA highlighted in a Nov-2018 analysis, Saudia has become the eleventh airline globally with a narrowbody lie-flat product – quite an accomplishment for an airline that has not historically been known for its premium product. 

See related report: Saudia adds lie-flat on narrowbody A320ceos and A321neoLRs

Saudia to continue improving inflight product as more new aircraft are delivered 

While the new lie-flat seats are initially being introduced on retrofitted A320ceos, Saudia will expand the offering as it renews its narrowbody fleet from 2020 with A320neo family aircraft.

Saudia is acquiring a mix of A320neos, A321neos and A321neoLRs – all of which provide an opportunity to introduce product improvements, although only the A321neoLRs will have lie-flat seats (along with the retrofitted A320ceos).

After the airline has focused mainly on widebody improvements and growth in the first phase of its transformation, Mr Albrecht said Saudia will focus from 2020 on “refreshing and growing the narrowbody fleet”.

Saudia is committed to acquiring at least 30 A320neo family aircraft and will also take over the 11 A320ceos now operated by flyadeal (although it will likely be a few years before these aircraft are transferred). All 11 of the flyadeal aircraft and 26 of Saudia's A320ceos are less than two years old. However, Saudia also has 18 A320ceos that are eight to 10 years old, and all 15 of its A321ceos are six to eight years old (some of these aircraft will be phased out as A320neo family aircraft are delivered). 

On the widebody side, Saudia has only eight 787-10s remaining on order, which will be delivered starting in 2019. Mr Albrecht said Saudia is “analyzing opportunities of course” for more widebodies. “It’s a young fleet but based on expected market growth we know that we will eventually need additional aircraft orders to be placed but there is nothing concrete at this time.”

Saudia reduces non-fuel CASK by 27%

The fleet renewal has not only provided an opportunity to improve Saudia’s product but is also generating cost savings due to the efficiency gains.

Mr Albrecht said that Saudia had achieved a 27% reduction in non-fuel CASK over the past few years. “It shows we are very aggressive in reducing the cost and very aggressive in trying to build cost efficiencies.”

The reduction in non-fuel costs is particularly important as it has come at a time when the government has phased out historical fuel discounts that were only available to Saudia (which created an unlevel playing field that private airlines had long complained about). Saudia has been paying market rates on fuel in Saudi Arabia since 1-Jan-2018. 

Saudia was recognised by CAPA for its turnaround efforts 

While Saudia still has plenty of work ahead to complete its turnaround, the accomplishments achieved since Mr Albrecht joined Saudia in early 2017 have been noteworthy. CAPA cited the product improvements, fleet renewal, international expansion and dual brand strategy in selecting Saudia for the CAPA 2018 Asia Pacific Turnaround Airline of the Year Award.

In accepting the award at the 8-Nov-2018 CAPA Asia Pacific Aviation Awards for Excellence dinner, Mr Albrecht pointed out that the transformation project had begun a year before he joined, and the credit should go to the Saudia team. “I just witnessed a lot of work in progress, a lot of good ideas and a lot of good things that were happening. We jumped on board and we continued to invest. It’s really a credit to employees of Saudia”, he said. 

“The job is really to modernise the airline, to work with the team, to make people aware all the support from the government the subsidies the incentives are all gone. It’s now up to us. We are standing on our own feet and you have to convince people that this is now headed to the future.”

During the CAPA TV interview Mr Albrecht added: “It has been a big, big transformation and a successful transformation process. We are focusing now on the big opportunities that we have, focusing on product improvement and focusing on the benefit of having a new hub in our new terminal in Jeddah.”

“I have used the term sleeping giant. Saudia is the 30th biggest airline in the world. We have so much potential but it has been neglected over the years for several reasons. Now with a focused approach we are seeing quite a success in putting Saudia to where it belongs.”

Saudia awarded the CAPA Asia Pacific Airline Turnaround of the Year Award

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